Capitalism Will Eliminate Poverty in Africa

April 20, 2012 • Commentary
This article appeared in The Brenthurst Briefing on April 20, 2012.

The recent recession has reinvigorated anti‐​capitalists everywhere, not least in Africa. In the continent’s economic powerhouse, South Africa, the rhetoric has, perhaps surprisingly, been most ardent. Blade Nzimande, the Minister of Higher Education and Training, said that there were no capitalist ideas that could address the problems that South Africa faces. Jeremy Cronin, the Minister of Transport said that “There is now a well‐​established scientific consensus that our present global economic trajectory is leading human civilization towards catastrophe.” Not to be outdone, the Deputy President Kgalema Motlanthe warned that “Capitalist crisis threatens world peace because it may… result in fascism.” Other leaders on the African continent have expressed similar anti‐​capitalist sentiments.

Yet, the last decade was great for Africa. The real gross domestic product rose at an average annual rate of 4.9 percent between 2000 and 2008 — twice as fast as that in the 1990s. It is true that as a result of the financial crisis, African growth had slowed to 2 percent in 2009. But, it has since returned to an average annual rate of 5 percent. Developed economies, which contracted by 3.5 percent in 2009, have also returned to growth.

What was the impact of that growth on the lives of ordinary Africans? According to the most recent World Bank estimate, “For the first time since 1981, less than half of … [sub‐​Saharan Africa’s] population (47 percent) lived below $1.25 a day. The rate [of poverty] was 51 percent in 1981. The $1.25-a-day poverty rate in SSA has fallen 10 percentage points since 1999. Nine million fewer people [were] living below $1.25 a day in 2008 than 2005.” That reduction in poverty is especially encouraging considering that the population of SSA more than doubled between 1981 and 2008, rising from 398 million to 813 million.

What is true for Africa is also true for the rest of the world. In 1981, 70 percent of people in the developing world lived on less than $2 a day and 42 percent on less than $1 a day. In 2012, 43 percent lived on less than $2 a day and 14 percent lived on less than $1 a day. According to Laurence Chandy and Geoffrey Gert of the respected Brookings Institution, “Poverty reduction of this magnitude is unparalleled in history: Never before have so many people been lifted out of poverty over such a brief period of time.”

What accounts for Africa’s changing fortunes? According to a well‐​known report “What’s driving Africa’s growth” that was published by McKinsey in 2010, “resources accounted for only about a third of the newfound growth. The rest resulted from internal structural changes that have spurred the broader domestic economy.” Those structural changes included:

  • Reduction of inflation from an average of 22 percent in the 1990s to 8 percent in 2000s.
  • Reduction of foreign debt by one third.
  • Reduction of budget deficit by two‐​thirds.
  • Improvement of the business environment.
  • Privatization of (some) parastatals.
  • Reduction of corporate taxes.
  • Reduction of barriers to trade.
  • Improvement of the legal environment.

In a word, Africa has become more economically “liberal.” The Fraser Institute, which measures economic freedom in 141 countries on a scale from zero to 10, found that economic freedom in Africa rose from an average of 4.94 at the end of the Cold War to 5.91 in 2008. Unfortunately, following the outbreak of the financial crisis, economic freedom has mildly declined to 5.90.

While economic reforms in Africa are encouraging, it is important to keep in mind that Africa still has a long way to go. Economic freedom in China, for example, was 6.4 in 2009. It was the same in India. Hong Kong and Singapore, which placed first and second in the Fraser Institute’s Economic Freedom of the World report, had ratings of 9 and 8.7 respectively. To sum up, evidence shows that:

  1. Much of Africa’s growth during the past decade should be attributed to economic liberalization.
  2. Adjusted for the increase in Africa’s population, economic growth has led to substantial poverty reduction in Africa.
  3. Africa remains the least economically free continent in the world.

African countries should use these good times to implement necessary, if occasionally politically painful, reforms and reap the benefits of faster growth. For example, a booming economy is typically associated with capital inflow and job growth, and that provides an opportunity to privatize state‐​owned enterprises and reduce public sector employment.

To reform, however, the African elites will have to overcome deeply‐​rooted prejudice against capitalism. Part of that prejudice has historical roots. Many African intellectuals equate imperialism with capitalism, even though many former colonies are rich (e.g.: the United States) and many rich countries never had colonies (e.g.: Switzerland). Part of it is ideological, as many African leaders have been taught to be suspicious of capitalism while being educated or trained in the Soviet bloc. Part of it is self‐​interested, as many rich and politically‐​connected Africans enjoy monopoly rents that would be threatened by increased competition.

The recent recession has given new ammunition to both groups. Capitalism, to be sure, is not perfect, but it is by far the best system when it comes to wealth creation and human development. For that reason, it is important to get the story behind the recession right.

Many commentators in the United States agree that no explanation of the 2008 financial crisis can be complete without an appreciation for the destructive, if unintended, role played by different branches of the U.S. government. To wit:

  1. The lax monetary policy that the Federal Reserve Bank pursued following the 2001 recession and 9/11 attacks fueled the housing bubble.
  2. The same goes for the Congressional legislation, which encouraged that banks give mortgages to people whose income and credit rating should have disqualified them from owning a house.
  3. The U.S. government‐​sponsored enterprises such as Fannie Mae and Freddie Mac distorted the risk associated with mortgage lending by purchasing sub‐​prime loans from commercial banks.

Similarly, the subsequent recession should not be seen as a crisis of capitalism per se, but as a crisis of Western social democracy. For decades, Western governments have spent more money than they raised in taxes. France, for example, has not had a balanced budget in over 30 years. As a consequence of overspending, Western governments have acquired massive explicit debts as well as monumental implicit debts (i.e.: unfunded promises to pensioners). A massive increase in taxes and regulation suffocated growth — which has declined in Western Europe every decade since the 1950s — and job creation. It was only a question of time before the financial markets lost faith in the Western governments’ ability to honor their financial commitments.

But capitalism is flourishing elsewhere. From Asia to Latin America, economies are growing and lifting tens of millions of people from poverty each year. Africa has rejected capitalism once before. In the 1960s, just as they gained their independence, most African governments opted for some form of socialism. Ordinary Africans continue to pay the price for that fateful decision to this day. It would be a tragedy if the tendentious (mis)understanding of the causes of the recent recession prevented Africa from future liberalization, faster growth and further reduction in poverty.

About the Author